HAMP And The Negative Amortization Loan
by Susie in Glen Ellyn, IL, USA and by David in Chester, CT
Ask Kate about HAMP and the negative amortization loan: Hi Kate. I do qualify for a HAMP loan which would ultimately reduce my current mortgage payment by half. Does this create negative amortization on my loan? Does the mortgage debt continue to increase because I am only paying the reduced amount against my loan? Yes it may buy me time, but bottom line do I end up further in debt?
Kate Answers: HAMP and the Negative Amortization Loan
Dear Susie, What a great question.
A negative amortization loan can be a real enemy to the homeowner's equity.
Typically, the negatively amortizing loan offers minimum house payments, not enough to pay the interest being charged that month.
So the minimum payment is seldom sufficient to reduce the mortgage balance. In fact, it can increase the mortgage balance. As we've seen during times of decreasing real estate values, this can become a formula for foreclosure. So I understand your concern.
Now of course you will have to read your official loan documents to be sure, but your HAMP loan should not have negative amortization.
However... you may owe a lump sum when you refinance or sell your house. (Sigh, sorry to have to give you a however.)
How HAMP Creates Affordable Monthly House Payments
Here is how HAMP can help struggling homeowners. Based on the underwriting process, the homeowner is assigned a low interest rate and affordable mortgage payments based on a reduced loan amount.
The difference between the reduced loan amount and the balance currently owed receives a forbearance. This means it is set aside to be paid back as a lump sum when you refinance or eventually sell the house.
For example, let's say you owe $200,000 on your mortgage but HAMP bases your monthly payments on a reduced loan balance of $140,000. The remaining $60,000 receives a forbearance, to be paid back when the house is sold or refinanced.
Generally speaking, there should be no monthly payments on the amount receiving the forbearance. Plus no accruing interest. Therefore, your mortgage balance would not increase. So it does not fit the definition of a negative amortization loan
Watch for your HAMP loan documents which you should receive after your trial period of 3 house payments. Read them carefully and enlist a trusted adviser for help understanding the fine print, if necessary.
Guidelines for Initial HAMP Eligibility
Here are the minimum guidelines to determine initial eligibility under the HAMP program.
- The home is your primary residence.
- Your mortgage was obtained before January 2, 2009.
- Your mortgage balance is under $729,751.
- You can demonstrate a financial hardship.
Ask Kate About Mortgage Modification: Adjustable vs Fixed Rates By David from Chester, CT
We were approved for a HAMP with a 2% rate. We were all excited until I read that the rate then goes up after 5 years to whatever the going rate is at the time of the modification is permanent.
For us, that is 3 months from now which in all likelihood is going to get us about back up to where the original rate was, give or take just a little.
So why is this the case? This means we have to stress out that the mortgage will be going up again in 5 back up to our originally unaffordable payment. So the HAMP is only a temporary fix? I thought it was permanent.
Would the HARP rate be a permanent rate? We did not qualify for HARP.
Is there any way to get our lovely 2% rate fixed?
Worried about the future.
Ask Kate answers: Mortgage Modification and Adjustable vs Fixed Rates
Modifications come in different shapes and sizes.
For example, in Know Your Options, Fannie Mae says a modification can change an adjustable rate mortgage into a fixed rate, extend the term of the loan to 40 years to get a lower payment, and either permanently or temporarily lower the interest rate.
This is why borrowers must read the terms of their modifications as shown in their loan documents before signing them.
So do this. Call your loan servicer to let them know your mortgage rate is scheduled to adjust and that the monthly payment is reverting back to the unmodified amount that is still not affordable.
Then request another modification. Be sure to go through the terms with a fine tooth comb. Know what you are signing!
Read about the changes to the HAMP Mortgage Modification program
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